How an Ownership Culture Can Benefit Your Company
When people at all levels of a company – from the management to the front lines – are trained and empowered to think and act like corporate owners, great things happen. Employment and average incomes rise, innovation leads to valued products and services, the presence of the company is felt by the community, and shareholders enjoy higher share price returns. At Fortuna Advisors, we call this an “ownership culture.”
Most people will agree the benefits of ownership culture are attractive, yet those same people may not have ever been empowered to act like an owner, know how to do so, or to what degree their own acts of ownership can help transform the organization.
In theory, it’s simple. Company owners and founders are highly motivated to outperform the market, set aspirational objectives, and challenge the status quo. Their personal reputations are linked to that of their company, which leads to game-changing processes for decision making, budgeting, performance target setting, investment making, and so much more. They encourage others to do so as well.
My colleagues and I have witnessed the dramatic positive effects that acts of ownership have on corporate behaviors. Here’s one example of how a major business decision was handled differently than expected due to an ownership culture.
The Situation: A management team that overcame revenue and EBITDA-based incentives outsourced an underutilized manufacturing plant to a contract manufacturer. They signed a contract to purchase quantities near cost, freeing up capital for more profitable activities. The company had owned and operated the plant for quite some time, producing products both for itself and, to a lesser degree, for third parties. The plant had significant excess capacity which was anticipated to continue into the foreseeable future. A contract manufacturer that was familiar with the company expressed interest in purchasing the plant for approximately book value and acting as a contract manufacturer moving forward.
The Choice: The contract manufacturer offered the company a long-term contract to produce the products at a small premium, content to offer attractive pricing because they would reap the benefit of excess capacity. Selling to a wide range of third parties was their core competency.
The Decision: Company management knew immediately that if they sold the facility, their revenue and EBITDA margins would decrease, due to the loss of third-party revenue and the new need to pay a small contract manufacturing premium. And, the sale of the plant would decrease their bonus under the current incentive structure. However, examining the decision by thinking like owners, they decided to sell the plant, since they could offset lost EBITDA by reallocating the newly freed up capital to more profitable opportunities.
As demonstrated in the above example, in an ownership culture, decision-making and performance measures are simplified. Clarity results, allowing teams to work more nimbly and efficiently evaluate and act on opportunity.
Consider how your company management’s behaviors and decision-making would change if members of the C-Suite owned 100% of the company with no outside stakeholders. You likely would not see as many reductions in R&D, brand-building, advertising, or employee training in order to hit short-term accounting goals. Instead, you would come to expect a healthier balance of short- and long-term approaches where new ventures, innovation, and risk are embraced, so long as the economics of such ventures appear favorable.
While many company cultures are driven by slogans and business as usual, ownership culture is about transforming executive behaviors through better incentives, planning, and decision-making processes.
Written by Gregory V. Milano.
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